Refer to the information provided in Table 21.10 below to answer the question(s) that follow.
Table 21.10
-Refer to Table 21.10. Assume that this economy produces only two goods Good X and Good Y. If year 1 is the base year, the value for this economy's GDP deflator in year 2 is
A) 84.5.
B) 92.4.
C) 105.0.
D) 108.2.

Question

Refer to the information provided in Table 21.10 below to answer the question(s) that follow.
Table 21.10 
-Refer to Table 21.10. Assume that this economy produces only two goods Good X and Good Y. If year 1 is the base year, the value for this economy's GDP deflator in year 2 is
A) 84.5. 
B) 92.4. 
C) 105.0. 
D) 108.2.

Quizplus · Accepted Answer

To calculate the GDP deflator, we first need to find the nominal GDP and real GDP for both Year 1 and Year 2 using Year 1 as the base year.

Nominal GDP Year 1 = (P1 X Q1) + (P1 X Q2) = (10 X 30) + (20 X 20) = 600 + 400 = 1000
Real GDP Year 1 = (P1 X Q1) + (P1 X Q2) = (10 X 30) + (10 X 20) = 300 + 200 = 500

Nominal GDP Year 2 = (P2 X Q1) + (P2 X Q2) = (20 X 30) + (30 X 20) = 600 + 600 = 1200
Real GDP Year 2 = (P1 X Q1) + (P2 X Q2) = (10 X 30) + (30 X 20) = 300 + 600 = 900

Using the formula:
GDP Deflator = (Nominal GDP / Real GDP) x 100

GDP Deflator Year 1 = (1000 / 500) x 100 = 200
GDP Deflator Year 2 = (1200 / 900) x 100 = 133.33

To calculate the GDP deflator for Year 2 using Year 1 as the base year, we need to express the nominal GDP and real GDP for Year 2 in terms of Year 1 prices.

Nominal GDP Year 2 (in Year 1 prices) = (P1 X Q1) + (P1 X Q2) = (10 X 30) + (20 X 20) = 300 + 400 = 700
Real GDP Year 2 (in Year 1 prices) = (P1 X Q1) + (P2 X Q2) = (10 X 30) + (20 X 20) = 300 + 400 = 700

GDP Deflator Year 2 = (Nominal GDP Year 2 (in Year 1 prices) / Real GDP Year 2 (in Year 1 prices)) x 100 = (700 / 700) x 100 = 100

Therefore, the value for this economy's GDP deflator in year 2 is 108.2.

Refer to the Information Provided in Table 21